Loan growth among challenger, specialist and digital banks slowed last year, hitting profits and prompting some to warn that it could mean a \u201crecalibration\u201d in the sector.<\/p>\n
Loan growth across the sector fell to 4.5 per cent in 2025, according to data from EY, compared with 8.9 per cent a year before, with many challenger banks<\/a> posting drops in profit for the year.<\/p>\n This decline in the rate of loan growth increases the pressure on non-traditional banks, many of which are struggling to compete with the high street lenders as customer growth slows and many retail clients prove unwilling to move their primary bank accounts away from an incumbent.\u00a0<\/p>\n \u201cThe 2025 analysis reflects a longer-term recalibration across the sector\u2009.\u2009.\u2009.\u2009while the sector is continuing to deliver strong growth, it\u2019s becoming harder to sustain by volume alone,\u201d said Ian Cosgrove, head of challenger and specialist banks at EY UK.<\/p>\n Deposit growth among challenger, specialist and digital banks also fell to 6.7 per cent from 12.3 per cent year on year, with property development lending particularly subdued early in the year.\u00a0<\/p>\n However, EY\u2019s analysis showed improved efficiency<\/a> among lenders, with net interest margins rising from 2.7 per cent in 2024 to 2.9 per cent last year, and cost-to-income falling from 65 per cent to 58.2 per cent over the same period.<\/p>\n EY\u2019s data represents 56 per cent of the total assets of 52 UK challenger banks.<\/p>\n Profit among some challenger banks suffered in 2025. Starling posted a drop in statutory pre-tax profit from \u00a3301mn in 2024 to \u00a3223mn last year, and mortgage and small and medium-sized enterprise specialist Atom Bank reported a drop in pre-tax profit of \u00a32mn year on year to \u00a35mn.<\/p>\n \u201cLooking ahead, as wider economic growth continues to moderate, the midsized banks that continue a disciplined strategy of prioritising sustainability and resilience over volume should be well placed to continue growing in the medium term,\u201d said Dan Cooper, head of banking and capital markets at EY UK & Ireland.\u00a0<\/p>\n Among the non-traditional banks, neobanks have been hit hardest by macroeconomic uncertainty, with profits being propped up by net interest income<\/a> \u2014 the difference between the amount charged on loans and paid out on deposits. Many are looking to build out other sources of revenue, for instance Starling\u2019s drive to gain new clients for Engine, its software-as-a-service product.<\/p>\n Specialist banks, such as Paragon Bank, have missed out on the big returns gained by other banks from higher interest rates due to their lack of current account offering, which was compounded by their exposure to rate-sensitive sectors like mortgages. <\/p>\n